“Creating Opportunities in Challenging Times”

“Creating Opportunities in Challenging Times”

Ralph J. Nappi, President
NPES and GASC
Forum – PI 2009
Beijing, China
11 May 2009

　　Good morning and thank you for the chance to share my thoughts at Forum-PI this year.  It is an honor to be with you and part of a distinguished panel of speakers.  To Mr. Wang Demao, I thank you personally and offer my best wishes for a successful China Print.  Because of your leadership, PEIAC has become an important organization in our industry.  It is an honor to know you and count you as a colleague.

　　Today it is my intention to not just provide numbers and statistics about the US and world printing industry.  But to consider the opportunities that these difficult times provide.  My presentation is entitled “Creating Opportunities in Challenging Times” and it is so named because I believe times like these distinguish leaders and the companies they run.  I am sure many of you have heard the analogy “A rising tide lifts all boats.”  Now as the tide goes out it takes a nimble and savvy captain to negotiate the rocks and currents that a low tide and turbulent waters create.

　　There are great opportunities in these times, and in the next 12 to 24 months we will be talking about those great success stories that were germinated and nurtured in these current times.  I believe Charles Darwin’s 150 year old concept of evolution is another pertinent analogy for our current times.  Exactly, two hundred years ago Charles Darwin was born, 50 years later he developed his famous view on the evolution of species (Slide 2).  He wrote, and I quote “It is not the strongest of the species that survives nor the most intelligent that survives.  It is the most adaptable to change.”

　　The application of this concept goes well beyond the evolution of species for it is also the most adaptable business that not only survives, but thrives!

　　Today I would like to touch on six areas I believe are opportunities for printing and printing equipment companies despite our tumultuous business environment. (Slide 3)

　　1. The World
　　2. Digital and Packaging
　　3. Ancillary Services
　　4. Integrated Communication Services
　　5. Sustainability
　　6. RFID and Electronic Printing

　　Standing in front of you in Beijing, China at the world’s fastest growing printing machinery trade show seems to be overstating the obvious nature of the first opportunity.  The world has realized the potential that China, along with Brazil, Russia and India, provide for our industry.

　　My organization, NPES, recognized the great potential of the China market 11 years ago under the leadership of my predecessor Regis Delmontagne.  The MEIHU joint venture was started that has provided great benefit for both organizations.

　　Looking past Asia, you will see on this chart (Slide 4) from our World-Wide Market for Print study, North America’s market for print declining from 32.5% to 29.8% in 2011; with Asia being the prime beneficiary with an increase from 27.6% to 30%.  Western Europe also sees a noteworthy decline, while Latin America and Eastern Europe shows increases.

　　On this next chart (Slide 5) you will see the specific numbers for the geographic regions that I referenced.  With Eastern Europe and the Middle East showing growth in excess of 50% during this time with Asia and Africa not too far behind.

　　If we focus on specific markets or countries (Slide 6), you will see that despite the US and Japan not keeping up with inflation, those two countries still account for over 40% of the world print market.  So these countries cannot be discounted if sheer volume is your metric.  If we consider the growth market here in China at 60%; Brazil at 53% and India at 73% all are areas that provide huge potential for our industry.  These areas are all obvious for their growth potential but less so are some other areas that I realized during my recent trip to Dubai for Gulf Print.  While today’s Brazil, Russia, India and China opportunities offer great potential, the Middle East and Africa, along with Eastern Europe, are where your development thoughts need to be.

　　While traveling to the UAE last month to participate in Gulf Print it became very clear to me that despite the world economic challenges their commitment to raising the level of their business to be global competitors was apparent.  I spent time touring an ISO certified progressive printer called Color Lines in Dubai and talked with their intensely entrepreneurial president and owner Tarik Jawharji.  While time won’t allow me to get into any depth, I assure you that companies like Color Lines are adaptive and aggressive companies that consider the WORLD an opportunity.

　　The second opportunity is digital and packaging.  What more can be said about these two areas that has not already been written and talked about for a long time.  Yet many printers still don’t consider the technological improvements and quality of digital to be real.  Ladies and gentlemen, that myth has long been debunked and for printers in China please understand digital printing provides a huge opportunity with great margins.  It calls for a complete reconsideration of the way a business is run because the sales, service and execution of the digital driven print job is very different.  The technological advancements of digital and the software that drive them has done more to rewrite the rules of the printing game then any invention in our industry.   Those that ignore this do so at their own peril; and the options and variables that digital provide are downright FUN also!!  A great example is on-demand book publishing.  In the US two of the largest platforms for book publishing are Lulu.com and Lightening Source.  Their average print run is 1.8 books.  Yes, that is correct:  less than 2 copies!  This is only possible because of the benefits of digital printing!

　　This next chart (Slide 7) highlights the other great growth area that is barely affected by the worldwide economic slowdown and that is flexographic and package printing.  In bad times we still need to buy products that require packaging.  Food, clothing, water…just to name a few.  All these “packages and boxes” are printed.  You will see on this slide that the greatest forecast areas for growth by print product are in the packaging area – 20%; carton – 22%; flexibles – 21.8%; and labels – 17.1%.  Once again these areas provide a chance for companies to excel in challenged times.

　　Now let me tell you about the US market and how it leads me to my third area of opportunity.  I warn you…for the faint of heart these next few graphs will not be pretty; nor is the US print market.  But in times of turmoil come times of great creativity and promise.  Here you will see in (Slide 8) actual numbers and forecast through 2013, commercial printing shipments.  Commercial printing shipments is the largest sector of printing in the US.  In 2007 it peaked at just over 100 billion US dollars.  For the next seven years it is anticipated we will see a 30% decline to $70 billion.  If this doesn’t plan to change the face of commercial printing in the US nothing else will!

　　Our next chart (Slide 9) shows a similar trend in the number of printing establishments in the US.  While the time period is different the establishments are focused on the same business, commercial printing.  In the US we are losing printers at a rate of about 1,000 establishments per year and we are expected to lose as many as 1,700 by the end of this year alone!

　　You will see this is all driven by the slow to negative growth that has occurred in recent years.  (Slide 10) 2008 and 2009 actually show a contraction in printing shipments.  But the purpose of sharing this graph with you is not to focus on the lack of growth, but to focus on the categories that make up the entirety of the data.  To highlight my previous point of digital and to bring up the next opportunity which is what we call “ancillary services.”

　　In the US it has become clear that in order to survive as a printer there must be more offerings than ink on paper because price pressures and over-capacity make it impossible to continue as a viable operation (Slide 11).  In the last few years a growing part and disproportionately large percent of profit has come from areas that are related to, but not print.  Areas such as:  design, bindery, finishing, mailing and fulfillment services.  One area that I personally believe will provide the greatest future potential is digital asset management.  While the percent of this service is fractional today for printers at less than 1%, the potential is great because of the need for accurate data in order for customers to leverage the potential of digital and variable data print. (Slide 12)  Companies that are capable of capturing, storing, managing and delivering various levels of data for their customers will be paid handsomely for those services.

　　So to wrap up my third opportunity:  developing capabilities in ancillary services; particularly digital asset management can provide a substantial financial return for companies.

　　Before I get to my fourth opportunity, I should mention that these are placed in order of immediate relevancy and return.  As we discuss the next three, you will find that the potential for a return on investment tends to be further out in time.  But in my opinion, the return on time and resources devoted to these areas could be substantial.

　　My next opportunity is “Integrated Communication Services” is best illustrated by this photo that captures how mobility and the internet have changed the printing industry forever. (Slide 13)

　　Many of you may remember this photo of a US Airways plane that was required to make an emergency landing in the Hudson River by New York City in January.  While there has been much written about the amazing effort of the captain and his crew in safely landing the plane on water with no injuries to passengers, what is less noted is how quickly the news of the event spread around the world.  In the boat next to the plane that you see in the photo there was a passenger that took a digital photo of the plane with his cell phone.  That boat arrived quickly; only minutes after the plane went into the water.  The man that took the photo sent it, via his cell phone, to friends in Korea; moments later it was forwarded to people in France. The amazing reality now is the ability of people around the world to know, almost instantly, what is happening.  The sharing of this type of news was initially a service provided by print:  newspapers and magazines.  Then eventually broadcasting augmented print reports through radio and television.  Do you realize that the news of AND photo of this event was already around the globe BEFORE the local television news station’s helicopter was even in the air!  How is that for a major paradigm shift!  What impact do you suppose that has on print and broadcasting?  It has had a major shift as many know in the US newspaper and newsmagazines business.

　　Please forgive me as I move rather quickly through some charts and graphs that further illustrate my point of viewing our business in much broader terms than printing.  There is an urgent need for us to consider what we do as “Integrated Communications Services,” rather than printing services.

　　The Direct Marketers Association in the US sponsored a study about alternate media. (Slide 14) Specifically a study on the return each of the media provides for one dollar invested.  You will note both commercial e-mail and the internet offer a substantial return compared to other sources of marketing.  Although the return is expected to diminish over time it is still well above competitive sources like direct mail, newspapers and magazines.  But it is also important to note that studies regularly indicate that integrating a print campaign with an “e” based marketing campaign provides maximum return.

　　This next graph (Slide 15) brings us back to a global view which provides evidence of the shift of advertising dollars away from North America.  As you will see the share of global advertising spending by continent indicates a big increase for Asia – 21 to 29%!

　　Considering where the ad dollar is being spent by country related to GDP or gross domestic product, is highlighted on this next slide (Slide 16).  Right behind the Ukraine is China in the #2 slot!  This clearly indicates a need to consider connected and integrated marketing plans past print.  The money will continue to flow away from traditional media or print media to other areas as evidenced by these next two slides. (Slide 17)

　　You will see that the percent of advertising  spend by media indicates newspapers, magazines, yellow pages, all experiencing decreases during a ten year period ending in 2007.  With the internet realizing the largest percent increase with “other” methods of advertising showing growth.  The only “print media” that shows an area of growth in this time period is direct mail.

　　The final slide (Slide 18) for this opportunity illustrates the necessity for an integrated approach to our communication business through the growth of digital media.  This graph shows global media consumption in hours per week projected through 2020.  It is no surprise, especially to those of you with children, that the increase in digital media consumption, including wireless, gaming, digital radio and TV and of course internet has been driving a buyer demographic that is quickly becoming the most affluent and influential group the world has ever seen.

　　So why do I spend so much time highlighting my 4th point?  Because I believe it is the most important and relevant point of all six in which we have some control over in the near term.  It will, without doubt, have the largest impact on our business in the next ten years and determine the winners and losers in our industry.  Businesses will succeed in direct proportion to the ability to adapt the business that leverages “integrated communication services” and equipment.

　　The fifth area of opportunity is a responsibility that companies have in addressing the environmental impact of what we make and sell. (Slide 19)  Sustainability has reached new heights of importance.  The confluence of political pressures and increasing affordability makes this as much an opportunity as it does a responsibility.  In the US the political pressures driven by consumer concerns for waste and the environment is driving a number of state laws that may end the ability for companies to mail printed material to anyone without their permission.  This is driven by the perceived lack of responsiveness to waste and the depletion of natural resources.   Both, which in most cases, are untrue because the printing industry does a much better job than most manufacturing industries in offering environmentally friendly products from recycled papers to water- and soy-based inks.  The growing affordability and need by customers to respond to this recent trend is providing opportunities for companies that give this more than lip service.  And to those that do give lip service, there is a recent effort to start to expose companies that “green wash” or intentionally mislead or dramatically understate the reality of their sustainability offerings.

　　The bottom line for the printing industry is the responsibility we have to our environment and customers to provide products and services that address this important trend.  And recent indications from customers show an increasing willingness to pay the price for these services as long as the differential is not vastly higher.

　　My last point addresses the convergence of emerging technologies and print.  For those of you that receive PRINT World News from NPES, our monthly trends in print e-newsletter, know the amazing advances that RFID and printed electronics have made in recent years.  (Slide 20) The decreasing cost for printing radio frequency identification tags and antennae is being driven by many companies including one of the worlds largest:  Wal-Mart.  Their interest lies in the fact that incredible amounts of money can be saved in making the supply channel, inventory and warehousing, more efficient.

　　Other examples, Esquire Magazine’s October 2008 issue boasted the first ever E-Ink magazine cover (a sample I have with me today if you would like to see it).  Beside the neat technology of E-ink, it was Esquire’s most profitable issue in 75 years.

　　The healthcare industry also has been very involved in utilizing ink jet technology in many ways, one of which actually is in beta testing - to print human skin!  As far off as this sounds, it is the visionary process of today that creates tomorrow’s commercial successes.  The technology is complicated and futuristic but my point is simple:  thinking this way creates new and unusual partners that can provide unlimited potential.  But enough of the “pie in the sky” ‘Star Trek’ talk.  Let me wrap up with a few thoughts on future trends.

　　First:  It may be hard for us to acknowledge, but print is no longer the #1 marketing medium.  There is nothing wrong with this if we recognize our business is transitioning to more than print, which leads me to the second point.

　　In the future, generalists will oversee print purchases.  Up to this time it was likely to be a print buyer or ad agency that specialized in print.  Now it will be a more broadly educated communications generalist that will be a younger, more digital savvy media specialist that wants and expects partners that know more than just print.  Those that don’t come to the table as communications consultants will be at a disadvantage because more companies will source print over the web, and print return on investment will weaken when executed independently.  This will also cause commercial print volumes to decrease.  But print runs will be more targeted and successful.  So an integrated media approach will be favored and provide huge opportunities for companies that offer complete communication services that place a premium on digital asset management which permits a targeted outreach to customers.  Finally, those companies that display a genuine interest in offering environmentally friendly products and services, at an affordable price, will be rewarded handsomely for all the right reasons.

　　Despite some real challenges for print, I am very optimistic about our future.  I am optimistic because as the world becomes a smaller place a premium will be placed on companies that understand how to leverage the convergence of message, media and mobility.  I believe we are best positioned to do this.

　　For those companies that adapt like Charles Darwin wrote in his theory of evolution, the world will reward them greatly; and the next time we are together I know we will be celebrating examples of great companies led by great leaders.  Some that are sitting here today.

　　Thank you!

　　NPES and GASC
　　1899 Preston White Drive
　　Reston, Virginia 20191
　　USA

　　5 May 2009